With the passage of the Affordable Care Act, renewed attention is being given to reforming how health care is organized and delivered. But there’s another element needed for sustainable health care reform: finding ways to deal with unsustainable increases in health care spending. And that will require developing a more rational way to reimburse physicians.

The Good News… and the Less-Good News
Both Medicare and the private sector are engaged in a wide variety of demonstrations and pilot programs designed to encourage greater efficiency and quality in the delivery of care. Many of the early initiatives of the newly created Center for Medicare and Medicaid Innovation (CMMI) within the Center for Medicare & Medicaid Services (CMS) have focused on some aspect of Accountable Care Organizations or the promotion of primary care initiatives.

More recently, CMMI announced a bundled payment initiative that will test 4 different payment models. Unlike the current system of paying for individual services or according to type of care provided, these payment models use a single payment to cover all of the care provided for an episode of illness, such as a stroke. One model provides for shared savings between physicians and the hospital using a discounted Diagnostic Related Group, or DRG (a predetermined payment for treating a specific condition). Two other models bundle the inpatient stay with postacute care (using differing time periods after the hospital discharge); the bundled payment includes such costs as physician services, services of those providing postacute care, costs for any related readmissions, and all ancillary services provided during the episode. A fourth model pays the hospital a single prospectively determined amount to cover all services provided during the hospital stay, including any physician services.

The private sector is also experimenting with a variety of strategies to slow spending and improve quality. Several of the large insurers are piloting medical home models that pay primary care physicians for care coordination. Others are using performance-based pay that rewards improved quality and greater efficiency or are trying different versions of bundled or episode-based care. Some are reporting more success at improving quality than at slowing spending growth and are now experimenting with the size of the incentives being used.

Although such experiments may point to useful reforms, in my view, it’s both disappointing and inexplicable that CMS is devoting so little time and effort toward developing and testing better ways to reimburse physicians outside of payments that are bundled with hospital reimbursements. I realize that many physicians are becoming employees of hospitals, joining integrated delivery systems, or seeking other ways to protect themselves from the pressures of independent private practice. But as a long-time observer of the health care system, I think that encouraging physicians to adopt any strategy that strengthens the relative position and power of hospitals is not in the best interests of patients or the American health care system. And in any case, it is hard to believe that sizeable numbers of physicians will not be continuing in independent practices for the foreseeable future.

The Dysfunctional Payment Strategy
Since 1992, Medicare has been reimbursing physicians using the resource-based relative value scale (RBRVS). As most physicians know only too well, this system sets relative prices based on estimated work value, practice expense, and geographic adjusters. But it is the sustainable growth rate (SGR) that sets the dollar reimbursement rate by affecting the conversion factor in assigning relative weights to absolute dollars.

Most of the attention in the last decade has been on the SGR. The SGR links the growth in Medicare spending for physician services to the growth in the economy and then proposes changes in physician fees to counteract any growth in physician spending that exceeds the growth in the economy. The word proposes is used deliberately: the SGR has been enforced only once in the last decade because of concerns by Congress that an SGR-driven reduction in fees would decrease access to care for Medicare patients. In January, Congress and the physician community will once again face the prospect of a 27% reduction in fees unless another (“temporary”) fix can be devised.

Serious questions can be raised by an SGR-type mechanism that attempts to tightly tie only one part of Medicare spending with the economy. But a more important problem is that the SGR’s objective—to control total physician spending—is inconsistent with the incentives it produces. The SGR neither affects nor is driven by spending by any individual physician or physician group, no matter how large the group or how egregious their spending. In fact, it could be argued individual physicians or physician groups are implicitly encouraged to increase spending because their fees will be affected only by what all physicians do collectively.

This disconnect could be fixed by having the SGR set at the level of the practice, which would link the updates to the behavior of physicians in the practice. It’s not hard to imagine this being done for group practices of some size. It’s harder to imagine for very small groups or individuals because of all the adjustments that would be needed to correct for services to patients who were atypical in any way.

Of greater concern is that a billing system based on the use of the thousands of Current Procedural Terminology (CPT) codes for procedures and services performed by physicians makes it very difficult to encourage greater accountability or to reward better outcomes. Some health policy experts advocate various strategies to improve the accuracy of the RBRVS because they predict that fee-for-service billing is going to be part of our future under any likely scenario. But I’m convinced this misses the fundamental problem: it’s the use of a very disaggregated billing system that’s problematic, not fee for service per se. DRGs and episode-based payments are forms of fee for service—just not at the micro-unit level.

Developing a more aggregative payment system for reimbursing physicians would not be easy, nor can it be done quickly, but it is urgent to start as soon as possible. In the near term, a payment system could be developed that covers all of the services that a physician provides to a patient for the treatment of 1 or more chronic diseases. This is consistent with the work CMS has been doing with medical homes but would also include the cost of the physician’s services and all ancillary services. In addition, a bundled payment should be developed for high-cost, high-volume interventions such as bypass surgery or total joint replacement so that a single amount would be paid; all of the physicians involved with the patient’s treatment would divide that amount as they see fit.

Successful health care reform requires changing the delivery system, and a reformed delivery system isn’t going to happen without a more rational way to reimburse physicians. And a little more physician leadership would help, too.

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Gail Wilensky, PhD

About the author: Gail Wilensky, PhD, is an economist and Senior Fellow at Project HOPE, an international health foundation. She directed the Medicare and Medicaid programs, served as a senior adviser on health and welfare issues to President George H. W. Bush, and was the first chair of the Medicare Payment Advisory Commission. She is an elected member of the Institute of Medicine.

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